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Chapter 02

Evaluating Financial Performance

True / False Questions

1. An inventory turnover ratio of 10 means that, on average, items are held in inventory for 10 days.

True False

2. All else equal, an increase in a company's asset turnover will decrease its ROE.

True False

3. A company's return on assets will always equal or exceed its profit margin.

True False

4. A company's price-to-earnings ratio is always equal to one minus its earnings yield.

True False

5. Return on assets can be calculated as profit margin times asset turnover.

True False

6. All else equal, a firm would prefer to have a higher gross margin.

True False

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McGraw-Hill Education.

7. The times-interest-earned ratio always equals or exceeds the times-burden-covered ratio.

True False

Multiple Choice Questions

8. The most popular yardstick of financial performance among investors and senior managers is

the:

A. profit margin.

B. return on equity.

C. return on assets.

D. times-burden-covered ratio.

E. earnings yield.

F. None of the above.

9. Which of these ratios, or levers of performance, are the determinants of ROE?

I. profit margin

II. financial leverage

III. times interest earned

IV. asset turnover

A. I and IV only

B. II and IV only

C. I, II, and IV only

D. I, II, and III only

E. I, III, and IV only

F. I, II, III, and IV

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Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

10. Ratios that measure how efficiently a firm manages its assets and operations to generate net

income are referred to as _____ ratios.

A. asset turnover and control

B. financial leverage

C. coverage

D. profitability

E. None of the above.

11. Which of the following ratios are measures of a firm's liquidity?

I. fixed asset turnover ratio

II. current ratio

III. debt-equity ratio

IV. acid test

A. I and III only

B. II and IV only

C. III and IV only

D. I, II, and III only

E. I, III, and IV only

12. Ptarmigan Travelers had sales of $420,000 in 2013 and $480,000 in 2014. The firm's current

asset accounts remained constant. Given this information, which one of the following statements

must be true?

A. The total asset turnover rate increased.

B. The days' sales in receivables increased.

C. The inventory turnover rate increased.

D. The fixed asset turnover decreased.

E. The collection period decreased.

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